Learning Objectives:
- What’s a transfer on death deed?
- What makes it advantageous, and what are some limitations to this legal vehicle?
- Why should property owners consider a transfer on death deed?
What’s a Transfer on Death (TOD) Deed?
About a week from now, on July 19, 2024, New York State will join 31 other states that allow Transfer on Death (TOD) deeds for real estate. So this can make a huge difference for individual home owners in their future planning.
A TOD deed functions a lot like naming a beneficiary on a bank account. What that means is when the property owner dies, the property automatically transfers to the named beneficiary. By having a TOD deed, named beneficiar[ies] are able to avoid probate proceedings and take ownership of the property immediately after the death of the owner.
When talking about TOD deed, there are two key parties to keep in mind. The transferor is the person who owns the property and will be transferring it to a beneficiary after she dies. The beneficiary, then, is the person who acquires the property after the transferor’s deaths.
Some readers may be familiar with a life-estate deed, which transfers your your home another person, while you retain the right to stay in the home until death. A TOD deed is different from a life-estate.
Using a TOD deed allows the property owner to retain full control over the property during her life because the property doesn’t transfer until after her death. This may not seem like an important distinction, because in both circumstances the owner is able to stay in and enjoy the property for her entire life. However, if she decides she wants to sell her property and move to Florida, for example, the difference is apparent. Under a life estate, she’d need the life-estate beneficiary to agree to the sale, which means that the beneficiary could fully block the sale. Under a TOD deed, however, she doesn’t need the beneficiary’s permission to sell the property. And that’s because the property ownership remains solely with the transferor until her death.
This difference also is apparent if you want to change the beneficiary to someone new, for whatever reason. People change their minds. Our lives evolve. Folks disappoint us. We should have free choice to respond accordingly.
Under a TOD deed, there’s a reasonably simple process for you to tell the world you’re not transfering your home at death to your originally-designated beneficiary. What the law says you can do is revoke – that’s a legal word meaning reverse – the TOD deed using a revocation form and filing it with the County Clerk’s Office.
As a result, then, a TOD deed preserves revocability, meaning that you can change your mind at any time. On the other hand, under a life-estate, the beneficiary would have to agree to being removed. This can present tough challeges for a number of reasons, including if you and the beneficiary are estranged.
So How’s It Done?
The law itself provides a rather simple form for the transferor to complete. Once completed – including the legal description of your property (you can find that on your current deed), it’s critical to sign the TOD deed in front of a notary public. You can find a notary at most banks.
Then you must take the TOD deed to the your County Clerk’s Office for filing. The employees there will help you get it filed. When it’s filed in the Clerk’s Office, it becomes official – not before that time, so this filing step is really important.
Should I Tell My Chosen Beneficiary about This?
Ultimately this is up to you, but it’s considered best practice to alert the chosen beneficiar[ies] that they will be receiving your property when you die, and they won’t need to wait around for a Surrogate Court’s proceeding. It happens automatically.
What if I’ve Got a Mortgage or There’s A Lien Against My Property?
The term mortgage relates to the lender who loaned you money to buy your house in the first place – or to obtain a home equity loan (also often called a HELOC). Most of us can’t afford to by a home in cash though a lucky few may be able to do so. When a bank or other person loans you money to purchase your home, they usually want some sort of guarantee they’ll be repaid. It just makes sense. Often, there’s a loan – that’s the money the bank gives you; then there’s a note – that’s the legal promise you sign to repay the loan; and finally, there’s a mortgage. A mortgage generally is understood to be the legal documentation that allows your lender to take your property if you don’t make regular repayments to the lender. A mortgage is typically filed in the County Clerk’s Office and is attached to your property for all the world to see that there’s a loan outstanding.
So what if, like thousands or perhaps tens of thousands of homeowners, you’ve got a mortgage? Or what if a credit card company or other creditor has filed a lien or judgment against your home? What happens to the TOD deed then?
Well, it’s quite simple. Under the new law, at your death, the beneficiaries take ownership of your home subject to – and that’s an important concept – the mortgage or other lien or judgment obligations. What this means in normal language is that the loan or lien continues to need to be repaid, and those beneficiaries are the ones who have to repay the loan or the lien or judgment after your death. In the case of a mortgaged home, if they don’t, the bank can take the property and sell it to repay the loan. Generally, in the case of liens or judgments, the home can’t be sold until they’re paid off.
It’s logical, we think, that a TOD deed can’t destroy the lender’s right to get repaid for the loan that allowed you to buy the property in the first place. Similarly, if you’ve got some debts that are reflected in a lien or judgment, that’s a formal legal mechanism ensuring repayment. So these debts need to get repaid.
Drawbacks to TOD Deeds
TOD deeds aren’t without their drawbacks, and so we strongly suggest you obtain the advice of an attorney well-acquainted with both the risks and rewards of TOD deeds so you’re fully informed. Frankly, a blog can tell you only so much – and we recognize that while we want to inform the public, in most cases, we’re not your lawyers, so this is not legal advice; it’s merely general information. And as the saying goes: your mileage may vary.
The Per Stirpes Conundrum. When naming multiple beneficiaries, for example, you can’t name them per stirpes. The term per stirpes is a Latin phrase that translates to “by branch” or “by roots.” In New York law, it refers to a method of distributing a deceased person’s estate. When an estate is distributed per stirpes, it’s divided equally among the decedent’s branches of descendants.
What does that mean in practice, you ask? The answer is best explained by an example. Say a parent passes away, and one of their children has died already. Under a per stirpes distribution, the deceased child’s share of the inheritance then is divided equally among that child’s own descendants (usually your grandchildren).
But TOD deeds are not permitted to transfer to beneficiaries on a per stirpes basis. So that means – again by way of an example – if you wish to have your TOD deed list your three children, and one dies before you, then the other two will become owners of your property, sharing on a 50-50 basis. The third now deceased child’s heirs won’t get his one-third share.
The Multiple Owners Challenge. Separate and apart from the per stirpes limitation, TOD deeds can be messy if there are multiple owners of a property. Depending on how the property deed was originally drafted, the transferor’s share will either transfer to the remaining owner or to the beneficiaries named on the TOD deed. The law decides which happens, and you can figure it out upfront, but usually only with competent guidance.
That’s why it’s really important to have some legal guidance, so you know what’s likely to occur.
Summary of the New Law and Your Next Steps
While creating a TOD deed is a relatively simple process, this is a developing area of law in New York.
As noted, the law goes into effect this month, so it’s brand spanking new! A TOD deed may be a good option for your and your estate, but other forms of estate planning may be more applicable.
Our team at The Coppola Firm can answer your questions about the new TOD deed. And if you need end-of-life planning and are curious about what options best suit you, contact us at (716) 839-9700 or info@coppolalegal.com.
We’re here to help.
